Britvic's (LON:BVIC) Q1 trading was in line with expectations, with organic constant currency revenue growth of 1.5% excluding the soft drinks levies, and reported revenue growth of 4.5%. With five-year EPS CAGR of 9.8%, DPS CAGR of 8.9% (to September 2018) and debt within the target range, this is a textbook consumer staples company.
During FY19, the business capability programme is due to be completed, bringing higher capacity and increased flexibility to the company. Trading at 10.1x consensus FY19e EV/EBITDA, the shares offer interesting value.
Light on detail but performance in line
Following feedback from shareholders, Britvic’s management has decided to scale back the level of detail disclosed with its trading statements, hence brand and regional performance are no longer supplied on a quarterly basis, with the intention of focusing more on the longer term.
We think the trends witnessed towards the end of FY18 are likely to have continued: geographically, we would expect France to have remained slightly weaker, while the businesses in Great Britain and Ireland would have continued to win market share.
In addition, the business capability programme implementation continues on schedule, with the commissioning of new lines, and a new warehouse in Rugby becoming operational later this year.
Strategy: Good shareholder returns
Britvic’s strategy revolves around four key themes: (1) generate profitable growth in core markets; (2) realise global opportunities; (3) step-change its business capability; and (4) build trust and respect.
This has generated good returns with a five-year EPS CAGR of 9.8% and DPS CAGR of 8.9%, and management believes it will continue to be a winning combination to deliver dependable and profitable growth.
Valuation: Reducing leverage and sustained growth should narrow discount
Britvic trades at a consensus FY19e P/E of 15.2x, a 31% discount to the U.K. beverages sector, and a 35% discount to AG Barr (calendarised), reflecting its geared balance sheet, partial ownership structure and steady earnings growth. However, we believe that with sustained earnings and income delivery, and reducing balance sheet leverage, those discounts may narrow.
Business description
Headquartered in the U.K., Britvic is a soft-drink beverage company. The company participates in the marketing and manufacturing of popular brands including PepsiCo (NASDAQ:PEP) in Great Britain and Ireland. Through a number of acquisitions, Britvic has expanded its operations into Ireland, France and, more recently, Brazil.
Bull
- Market leadership status: number one in branded still soft drinks and number two in branded carbonated soft drinks in Great Britain.
- Growing share in an expanding underlying Great Britain market.
- Further benefits of business capability programme in rationalising supply chain still lie ahead in FY19.
Bear
- French business performance somewhat weak.
- Brands are in part owned by third parties.
- Net debt leverage of 2.2x at end FY18 may appear high, although in medium-term target range is 2–2.5x. However, on reducing capex, leverage should fall through FY19 to consensus forecast of 1.7x in FY20.